Value investing is a smart approach to investing in stocks. It involves looking for stocks that are priced lower than their true worth. By identifying undervalued companies, value investors aim to benefit from the potential for these stocks to increase in value over time. In this article, we will look at how can mutual fund investors include this investing style in their portfolios.
If you wish to invest in value stocks through mutual funds, then you can do it using both active and Passive funds. Let’s first look at Investing in value stocks using Active Funds.
Investing In Value Stocks Using Active Funds
There is a specific class of mutual funds that invests in value stocks. These are called value or contra funds. Contra stands for ‘contrarian.’ These funds seek to invest in companies contrary to the general market taste. So, while they may not be strictly value stocks, they would still be in the ballpark.
If we see the 3-year rolling returns of value/contra funds vis-a-vis flexi-cap funds and the Nifty 500 index, value/contra funds have beaten the Nifty 500, but they have lagged behind the flexi-cap category.
Investing In Value Stocks Using Index Funds
A popular value index that has a number of ETFs and index funds mounted on it is the Nifty 50 Value 20 Index.
This index comprises 20 value stocks from the Nifty 50 group of stocks.
These value stocks are selected on the basis of certain financial metrics: return on capital employed or ROCE, price-to-earnings ratio or P/E, price-to-book-value ratio or P/B, and dividend yield.
From the Nifty 50 group of stocks, stocks with comparatively lower P/E and P/B and higher ROCE and dividend yield are included in the Value 20 Index.
Unlike active value/contra funds, this methodology remains unchanged, so you can be assured of getting exposure to value stocks at all times in a standardised manner.
How has the Nifty 50 Value 20 performed against the Nifty 50? Let’s check the five-year rolling returns of both.
Conclusion
Value investing is a very popular investing style and there are some options available to mutual fund investors that can help them take exposure to this style of investing.
One can invest in Value/Contra Funds (Active Funds) or Index Funds (Nifty 50 Value 20 & NIFTY 500 Value 50).
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